In choosing to implement Operation Twist, its latest attempt to stimulate the U.S. economy, the U.S. Federal Reserve has apparently decided to ignore the remarkable letter sent to chairman Ben Bernanke from Rebublican leaders Mitch McConnell, John Boehner, Jon Kyl and Eric Cantor.
In that letter, sent on Monday, the politicians had expressed concern about additional attempts to revive the recovery using somewhat experimental monetary policy:
“It is our understanding that the Board Members of the Federal Reserve will meet later this week to consider additional monetary stimulus proposals. We write to express our reservations about any such measures. Respectfully, we submit that the board should resist further extraordinary intervention in the U.S. economy, particularly without a clear articulation of the goals of such a policy, direction for success, ample data proving a case for economic action and quantifiable benefits to the American people. "
And: “We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy. Such steps may erode the already weakened U.S. dollar or promote more borrowing by overleveraged consumers. To date, we have seen no evidence that further monetary stimulus will create jobs or provide a sustainable path towards economic recovery.”
There have been some good responses to this bizarre request, even as the Fed apparently bites its collective tongue. Scott Sumner at The Money Illusion noted that inflation was higher during the George W. Bush administration and the U.S. dollar turned especially weak – with no letters sent to the Fed then.
And Free Exchange pointed out that there is a conflict between the argument that Fed policy hasn’t helped and that its policies have brought down the dollar and encouraged borrowing.
“The bigger question, however, is what the letter means,” the blogger goes on. “The Fed is stuck in a bit of a Catch-22. They're supposed to be independent, and an independent central bank does what's appropriate, damn the politicians. But the Fed is a creature of laws and men, and laws and men can be changed. The Fed is therefore only independent to the extent that it placates the politicians so that they don't revoke its independence. We'll soon see whether the Fed has decided to opt for independence or ‘independence’.”